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chapter Entrepreneurship, New Ventures, and

Business Ownership

Business Essentials, 7th Edition

Ebert/Griffin

Instructor Lecture PowerPoints

PowerPoint Presentation prepared by
Carol Vollmer Pope Alverno College
 LEARNING OBJECTIVES

After reading this chapter, you should be able to:

1. Define small business, discuss its importance to the economy, and
explain popular areas of small business.
2. Explain entrepreneurship and describe some key characteristics of
entrepreneurial personalities and activities.
3. Describe the business plan and the start-up decisions made by small
businesses and identify sources of financial aid available to such
enterprises.
4. Discuss the trends in small business start-ups and identify the main
reasons for success and failure among small businesses.

2009 Pearson Education, Inc.

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 L E A R N I N G O B J E C T I V E S (cont’d)

After reading this chapter, you should be able to:

5. Explain sole proprietorships, partnerships, and
cooperatives and discuss the advantages and
disadvantages of each.
6. Describe corporations, discuss their advantages and
disadvantages, and identify different kinds of
corporations.
7. Explain the basic issues involved in managing a
corporation and discuss special issues related to
corporate ownership.
© 2009 Pearson Education, Inc.
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 What’s in It for Me?

• By understanding the material discussed in

this chapter, you’ll be better prepared to:
1. Understand the keys to entrepreneurial success,
including business planning
2. Discuss the reasons for success or failure
3. Evaluate the advantages and disadvantages of
different kinds of ownership

© 2009 Pearson Education, Inc.

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 What Is a “Small” Business?
• Small Business Defined
– A business that is independent (not part of a larger
business) and that has relatively little influence in its
market.
• Why Small Business is important in the Indonesia
Economy
– Job creation: more than half of all new jobs created in the
Indonesia are by small businesses.
– Innovation: Most new innovative product or service ideas
come from small businesses. E.g., PC, photocopyier.
– Contributions to big business:
• Suppliers of specialized services and raw materials
• Sellers of larger firms’ products
© 2009 Pearson Education, Inc.
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FIGURE 3.2: Small Business by Industry

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 Entrepreneurship
• Entrepreneurship
– The process of seeking business opportunities under
conditions of risk
• Entrepreneur
– One who accepts the risks and opportunities of creating,
operating and growing a new business
• Small Business Owner
– A person who independently owns a business that
has relatively little impact in its market

© 2009 Pearson Education, Inc.

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 Entrepreneurial Characteristics
• Successful Entrepreneurs:
1. Are resourceful.
2. Are concerned about good customer relations.
3. Desire to be their own boss.
4. Can deal with uncertainty and risk.
5. Are open-minded.
6. Rely on networks, business plans, and
consensus.
7. Have different views on how to succeed, to
automate a business, and when to rely on
experience or business acumen/wisdom.

© 2009 Pearson Education, Inc.

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 Starting and Operating a New Business
• The first step: Crafting a Business Plan
– Business Plan: Conveys a description of the
business strategy for the new venture and how
it will be implemented
– A business plan should address:
• The entrepreneur’s goals and objectives
• The strategies that will be used to obtain
them
• The implementation of the chosen
strategies
© 2009 Pearson Education, Inc.
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Starting and Operating a New Business
• How do we prepare a business plan?
– Setting goals and objectives
– Sales forecasting
– Financial planning: prepare budget,
financial statements, financial analysis.

© 2009 Pearson Education, Inc.

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Methods of Starting the Small Business
1. Buying an Existing Business
– Less risk in purchasing ongoing, viable business
2. Franchising
– Advantages
• Proven business opportunity for franchisee
• Access to management expertise of franchisor
– Disadvantages
• Start-up costs for franchise purchase
• Ongoing payments to the franchisor
• Management rules and restrictions on the
franchisee
© 2009 Pearson Education, Inc.
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 Starting the Small Business (cont’d)
• Starting from Scratch
– Disadvantage: Higher risk of business failure
– Advantage: Avoids problems of an existing business
• Questions to Be Answered:
1.Who and where are my customers?
2.How much will those customers pay for my
product?
3.How much of my product can I expect to sell?
4.Who are my competitors?
5.Why will customers buy my product rather than the
product of my competitors?
© 2009 Pearson Education, Inc.
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 Financing the Small Business
1. Personal Resources
2. Loans from Family and Friends
3. Bank Loans
4. Venture Capital Companies
5. Small-Business Investment Companies (SBICs)
6. KUR (Kredit Usaha Rakyat)

© 2009 Pearson Education, Inc.

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 Trends in Small-Business Startups
Emergence of
E-commerce

Crossovers from
Big Business

Opportunities for
Minorities & Women

Global
Opportunities

Better
Survival Rates

© 2009 Pearson Education, Inc.

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Five largest growth trends for new small
business startups
The first is the emergence of e-
commerce. The Internet provides new
ways of doing business, and
entrepreneurs are jumping on board.
Internet sales have increased from $55.7
billion in 2003 to $125.1 billion in 2007.

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Five largest growth trends for new small
business startups
Crossovers from big business is another
big trend.
Our text offers the example of John
Chambers who turned Cisco into a huge
Internet connectivity firm, after first spending
years working for IBM and Wang.

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Five largest growth trends for new small
business startups
Opportunities for minorities and women within the small
business market have grown rapidly. For example,
African American small business owners own 1.2 million
small businesses, an increase of 48% over the last five
years. Hispanic American small business owners own
1.6 million small businesses, an increase of 31% over the
last five years. Asian American small business
ownership has grown 24%
Nearly 11 million small businesses are now owned by
women.
All together, these businesses generate $2.5 trillion in
revenues each year.

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Five largest growth trends for new small
business startups
Women cited a number of reasons for starting
their own small business. Let’s review them:
• 46% of the women started their own business to
better control their own schedule.
• 24% of the women saw a market opportunity and
decided to pursue it.
• 23% of the women were frustrated by the “glass
ceiling” in wages at big companies.
• And the remaining 7% cited other reasons.

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Five largest growth trends for new small
business startups

Global opportunities represent another new

market for small business owners, such as
software development companies, consulting
firms and higher education.
44% of small businesses will succeed and
remain in operation after 4 years, offering better
survival rates than in the 1970s when nearly
half of all new businesses failed.

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 How about in Indonesia?
A. More than 95-98% percent of all businesses are
small, they employ 10 persons or less.
B. Why the businesses in Indonesia are dominated
by small ones?
1. Individualism trend.
2. Family oriented.
3. Lack of availability of fund.
4. Lack of awareness of the process of establishing
corporations.
5. The skills needed to set and manage large
companies are not there.
6. Lack of government support.

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The Labor Force Reflects the Importance of
Small Business
Over 86% of Indonesia businesses have no
more than 20 employees. The total
number of people employed by these
small businesses is about 25% of the
entire Indonesia workforce. Another
29% of the workforce is employed by
businesses with fewer than 100
employees.

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Success and Failure in new ventures

• Ultimately, 63% of all new

businesses fail in Indonesia.
• Each year 600,000 and 650,000
new businesses are launched in
Indonesia. 500,000 to 600,000 are
failed.

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 Reasons for failure
1. Poor management: it is not enough to know a
common sense about business, they must have
the basic business principles. How make a
proper decisions.
2. Neglect: Starting a new business requires an
overwhelming time commitment. Doing it “on
the side” usually isn’t enough.
3. Weak control systems: Without control systems,
small business owners don’t know about
problems until it’s too late.
4. Insufficient capital: Many experts recommend
that a new business should have enough capital
to last six months to one year without earning a
profit.
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 Reasons for success
• Hard work, drive, and dedication: Commitment is essential.
Nearly 44% of successful entrepreneurs interviewed by the
Ontario Department of Industry and Commerce cited
determination as the personal quality that contributed to
success.
• Market demand: Clearly, if there is demand for a product,
success will be easier.
• Managerial competence: Training and experience make a
real difference. Most successful entrepreneurs spend time
working in successful companies or they partner with others
who bring more expertise.
Luck: Never underestimate the importance of luck, but keep
in mind Thomas Jefferson’s saying: “The harder I work, the
luckier I become”!. Example, McAfee made a significant
profit once Microsoft announced that it is entering the
security business. 24
 Business Ownership
• Forms of Legal Ownership
– Sole proprietorship: Owned and operated by one
person
– Partnership: Sole proprietorship multiplied by the
number of partner-owners
– Corporation
• Choice of Ownership Form
– Based on the entrepreneur’s needs/desires for
control, ownership participation, financing
sources, and appropriateness of the chosen form
for the industry in which the firm will compete
© 2009 Pearson Education, Inc.
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 Sole Proprietorships

Advantages: Disadvantages:
• Freedom • Unlimited Liability

• Simple to form Limited resources

Limited fundraising
• Low start up costs capability
• Tax benefits Lack of continuity

Unlimited Liability
Legal principle holding owners
responsible for paying off all debts of a
business
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 Sole proprietorships\ traders
A. Sole proprietorships are the most basic legal form of business
organization.
B. Advantages:
A. Freedom: Sole proprietors answer to no one but
themselves—this is a terrific fit for certain personalities
(and we can probably all think of someone who fits the
profile!).
B. Simple to form: In some states, forming a business is as
simple as hanging a sign on the door.
C. Low start-up costs: Low costs go hand-in-hand with
minimal legal requirements
D. Tax benefits: Sole proprietors are taxed only on personal
income, and can take advantage of certain tax
deductions.
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 Sole proprietorships\ traders
A. Sole proprietorships are the most basic legal form of
business organization.
B. Disadvantages:
A. Unlimited liability: Sole proprietors are personally liable
for all debts incurred by the company (including damages
in lawsuits/claims). This is the most significant drawback
to this form of business.
B. Limited resources: This can ultimately limit the size of
the business.
C. Limited fundraising capability: Sole proprietors often
find it difficult to borrow money. Difficult to provide loan
security.
D. Lack of continuity: A sole proprietorship legally dissolves
when the owner dies. 28
 Partnerships
Advantages: Disadvantages:
• More talent and money • Unlimited Liability
• More fundraising Disagreements
among partners
capability
Lack of continuity
• Relatively easy to form
• Tax benefits
Unlimited Liability
Legal principle holding owners responsible for
paying off all debts of a business
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 Partnerships
A. The most common type of partnership, a general
partnership, is simply a sole proprietorship multiplied
by the number of partner-owners.
A. Advantages:
B. More talent and money: A partnership draws on the
talent and money of more than one person.
C. More fundraising capability: Partnerships are able to
borrow money more easily from lending institutions,
and also have the option of inviting more partners to
invest.
D. Relatively easy to form: Legal requirements are
limited, but must include a partnership agreement
of some kind.
E. Tax benefits: Partners are taxed only on personal
income.
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 Partnerships
A. Disadvantages:
1. Unlimited liability: Each partner is liable for all
debts incurred in the name of the partnership, even
if one partner incurs a debt without the knowledge
of the other partners.
2. Disagreements among partners: Partnerships have
been known to ruin relationships between close
friends and family members.
A. Discussion: What are some possible safeguards
against this happening?

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 Partnerships
1. Lack of continuity: When one partner leaves or dies, the
original partnership dissolves, and must be reorganized if
other partners want to continue.
2. Within a partnership, a significant level of conflict can be
healthy and creative, generating more effective solutions to
a range of different obstacles. However, an exit plan is still
crucial in case disagreements become unmanageable.
A. Discussion: What should be included in the exit plan for a
partnership?

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 Alternatives to General Partnerships
• Limited Partnership
– Allows for limited partners who invest money but are
liable for debts only to the extent of their investments
– Must have at least one general (or active) partner, who is
usually the person who runs the business and is
responsible for its survival and growth
• Master Limited Partnership (agreement)
– Organization sells shares (partnership interests) to
investors on public exchange. Investors are paid back from
profits
– The master partner retains at least 50 percent ownership
and runs the business, while minority partners have no
management voice

© 2009 Pearson Education, Inc.

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 Cooperatives
• Combine the freedom of sole
proprietorships with the financial power
of corporations
• Groups of sole proprietorships or
partnerships agree to work together for
their common benefit

© 2009 Pearson Education, Inc. 34

 What is a Corporation?

“An artificial being, invisible, intangible, and existing

only in contemplation\ reflection of the law.”
 Corporations
• Corporation
– Firms that have filed papers of incorporation.
– There are 4.93 million corporations in the Indonesia that
account for 20% of all Indonesia businesses, but generate
85% of all revenue.
• Corporations may:
1. Be small or large
2. Sue and be sued
3. Buy, hold, and sell property
4. Make and sell products
5. Commit crimes and be tried and punished for them
6. Have limited liability for individuals who form them
© 2009 Pearson Education, Inc. 36
 Corporations
• Disadvantages:
• Advantages:
– Double taxation of
– Limited liability: The
owners’ responsibility
dividends
for the debts of a – Fluid control
business is limited to – Complicated and
their investment in a
business
expensive to form
– Continuity
– Stronger fundraising
capability

© 2009 Pearson Education, Inc. 37

 Corporation
Advantages:
1. Limited liability: The liability of investors
(owners) for the debts of a corporation is limited
to the size of their investments—a huge benefit!
2. Continuity: Theoretically, a corporation may
continue to exist forever, with ownership
transferred via sale of stock.
3. Stronger fund-raising capability: Lenders are
more willing to grant loans. Larger corporations
also have the option of selling stock to raise
capital.
 Corporation
Disadvantages
1. Double taxation: Profits earned by corporations are
taxed at the corporate level, and then taxed again at
the ownership level. Is it fair? Who benefits?
2. Fluid \difficult control: Given the easy transfer of
ownership, corporations are subject to hostile
takeovers, which (at the very least) distract/divert
management from achieving the corporation’s goals.
El-Fayed took over Harrots.
3. Complicated and expensive to form: Costs include
filing fees to meet government incorporation
requirements, and usually legal fees as well. (e.g.,
must register to: ministry of Justice, chamber of
commerce, ministry of economics, local authority).
 Types of Corporations
• Closely Held (Private) Corporation: stock
is held by few people, not available to
public.
• Publicly Held (Public) Corporation:
shares are publically issued.
.

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 Types of Corporations
• Limited Liability Corporation (LLC). This is a
popular form of incorporation because
owners are taxed like partners but have the
limited liability of a corporation.
• Professional Corporation. These are usually
doctors, lawyers, etc. Their corporate status
provides limited liability, but an individual’s
negligent performance can make an individual
within the firm personally liable.
• Multinational (Transnational) Corporation
© 2009 Pearson Education, Inc. 41
 Comparative Summary: Three Forms of Business

Investment
Business Form Liability Continuity Management
Sources

Proprietorship Ends with death Personal, Personal

Personal,
or decision of unrestricted
unlimited
owner

General Personal, Ends with Unrestricted or Personal by

Partnership unlimited death or depends on partner(s)
decision of any partnership
partner agreement

Corporation Capital As stated in Under control Purchase of

invested charter, of board of stock
perpetual/ directors,
continue or for which is
specified selected by
period of years stockholders
Copyright ©2003 Prentice Hall, Inc. 4 - 42
 Managing a Corporation
• Corporate Governance
– The roles of shareholders, directors, and other
managers in corporate decision making and
accountability
– Corporate governance is established by the firm’s
bylaws and involves three bodies:
• Stockholders (shareholders): Investors who buy
ownership shares in the form of stock
• The board of directors: Group elected by
stockholders to oversee corporate management
• Corporate officers: Top managers hired by the
board to run the corporation
© 2009 Pearson Education, Inc. 43
 Stockholders: Owners of Corporations

• Stock: A share of ownership in a corporation

• Dividends: Profits distributed among stockholders

© 2009 Pearson Education, Inc. 44

 Types of Stocks:

1. Common Stock: The most basic form of ownership.

Common stockholders always have voting rights.
2. Preferred Stock: Offers fixed dividends but no
corporate voting rights.
A. Discussion: How many of you own stock? Which
companies? Why?

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 Special Issues in Corporate Ownership

• Joint Ventures and Strategic Alliances:

– Strategic alliance: Two or more organizations collaborate on
a project for mutual gain
– Joint venture: the collaboration of two or more
organizations on a project for mutual gain. Partners share
ownership of a new enterprise.
• Employee Stock Ownership Plans
– Allows employees to own a share of the corporation through
trusts established on their behalf
• Institutional Investors
– Control enormous resources and can buy huge blocks of
stock

© 2009 Pearson Education, Inc. 46

 Special Issues in Corporate Ownership (cont’d)

• Mergers, Acquisitions, Divestitures, and Spin-

Offs:
– Merger: Two firms combine to create a new
company
– Acquisition: One firm buys another outright
– Divestiture: Strategy whereby a firm sells one or
more of its business units
– Spin-off: A firm sells part of itself to raise capital

© 2009 Pearson Education, Inc. 47

TERIMA KASIH

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